Wednesday, 15 January 2014

The Punch Newspaper recently carried a report titled "CBN Defended Naira with $26.6bn in 2013." The report, apparently obtained from the Central Bank's website, indicated that this amount was sold to currency dealers in 94 foreign exchange Dutch Auctions between January and December 2013.

Indeed, in consonance with Lamido Sanusi's promise to maintain stability, the official naira rate of exchange against the dollar has ironically remained stagnant between N153 and N156, despite our increasing foreign reserve base.

Regrettably, however, the unofficial (street market) rate has gradually moved from a deviation of N1 or N2 to N20 per dollar; thus, an 'ingenious' bank or Bureau de Change could easily make a monthly profit of about N20m by simply buying $1m directly from CBN's allocations and selling same dollars elsewhere!

The resultant abuse of CBN's wholesale forex auction inevitably induced unbridled capital flight, characterized by huge bulk movements of hard currency through our airports and other land and sea borders.

The CBN's recent reintroduction of the earlier discredited Retail Forex Auction, has once more restricted direct sales of foreign exchange specifically to end users, in place of the former speculative hoarding by banks, under the Wholesale Auction System.

Furthermore, CBN has also reduced its weekly dollar allocations to BDCs from $1m to $250,000; regrettably, however, in spite of (or maybe we should say because of) these measures, the apparent shortfall in dollar supply to the open market has instigated a widening gap between official and Bureau de Change rates.

Consequently, the naira exchange rate mechanism has generally been a clear case of the tail wagging the dog, as increasing black market rates ultimately determine official rates.

The naira exchange rate is further characterized by the paradox of depreciation despite significant increases in dollar revenue and imports cover! For example, the naira exchange rate remained consistently at N80/$1 between 1994 and 1998, despite barely $4bn total reserves, while it has officially fallen below N150/$1 in spite of buoyant reserves consistently remaining above $40bn with more than 10 month's demand cover in recent years!

Inexplicably, however, in 2012, the IMF recommended a formal further naira devaluation, in order to reduce the size of government spending and also reduce budget deficit, and hopefully also restrain spiralling inflation, fuelled by stifling systemic surplus naira!

Undoubtedly, the universal antidote for low consumer demand and high unemployment is to increase government spending, and thereby create jobs and stimulate demand. Consequently, IMF's recommendation and CBN's inappropriate tight monetary policy instruments, which also fuel inflation, and trigger cost of funds in excess of 20 per cent to SMEs, will invariably only deepen poverty nationwide!

Nonetheless, some observers blame our parlous economy and weak naira on our 'inability' to diversify our economy. However, these observers have never satisfactorily explained how our economy can be diversified when the growth engine of SMEs is constrained by high cost of funds, and low consumer demand caused by dwindling job opportunities plus increasingly low-income values, induced by oppressive inflation.

Conversely, however, I have consistently, rightly observed for several years, that our economy will remain distressed and unable to satisfactorily diversify because of CBN's unconstitutional capture of our export dollar revenue and the substitution of exclusively naira payments for monthly allocations to constitutional beneficiaries.

Furthermore, CBN has belatedly recognized the poisonous impact of commercial banks' ability to leverage on the monthly heavy inflow of naira allocations, which precipitate the unending spectre of excess cash, and the attendant necessity for CBN to reduce such surplus naira and contain inflation by borrowing from the same banks at oppressive rates of interest, only for the apex bank to inexplicably, thereafter, sequester the loans as idle funds, which cannot be applied for infrastructural enhancement or appropriation!!

Indeed, it is also instructive that CBN's cache of self-styled "own dollar" reserves accumulated from substitution of naira allocations increases in tandem with increasing naira surplus in the economy and deepening poverty nationwide! Incidentally, CBN's current 'own reserves' of over $40bn is not also available for reduction of our heavy debt burden; curiously, however, the apex bank still consciously seeks opportunities to invest 'its dollar reserves' in foreign economies, despite the paltry yields associated with such investments!

Nonetheless, Sanusi confirmed in his controversial letter of September 25, 2013 on "$49.9bn Unremitted Oil Revenue" to President Jonathan, that the treasury had received about $22bn as at July 2013 for oil exports. Consequently, since oil prices remained consistently over $100/barrel, cumulative oil earnings should exceed $40bn in 2013.

Thus, with the practice of CBN's usual substitution of naira allocations for dollar revenue, naira cash supply would increase by over N6tn (i.e. N155/$1), while commercial banks could also leverage almost tenfold on the fresh naira inflow to create systemic naira liquidity of about N60tn. Consequently, the total available spendable naira in the system would adequately purchase over ten times (i.e. over $400bn) the actual $40bn earned from crude oil sales in 2013!

Thus, CBN's substitution of naira allocations actually weakens the naira exchange rate! Worse still, CBN's confirmation that only $26.6bn (i.e. 65 per cent) out of the total $40bn revenue collected was auctioned, suggests that naira exchange rate would be under greater pressure if 35 per cent of the dollars earned (i.e. about $14bn) was short-supplied by CBN, despite the earlier provision of full naira cover for the total actual revenue of $40bn! It is not rocket science to deduce that systemic surplus naira and rationed dollar supply will deliberately artificially skew the exchange rate mechanism in favour of the dollar!

So, while it is true that CBN sold $26.6bn in foreign exchange auctions in 2013, it is not true that the sales process realistically defended the naira exchange rate; if anything, CBN's monopolistic rationed dollar auctions, after consciously flooding the system with naira allocations, should more appropriately be recognized as a contrived mechanism to continuously depreciate the naira, especially more so, whenever we earn increasingly more dollars!